Living in dead economy

A euro zone that somehow stays afloat but can’t be reformed, banks awash with cash that don’t lend, and incoherent economic policy. We’ve only found a sticking-plaster solution to our crisis

Jobs, rather than debt, are the core problem afflicting the United States. This is what the Federal Reserve declared on August 10, 2011 when it confirmed what many of us have feared: The country’s economy is stuck and without drastic action won’t move for at least two years. As an unprecedented statement by the nation’s central bank, it was a clear signal that the jobs crisis has no end in sight. It also serves as a plain message to elected officials: You are the only ones who can fix this mess.

The longer the economic crisis goes on, the less credible sticking plaster solutions become. Four years in, Europe is heading into a nasty recession, China is flirting with a hard landing, the governor of the Bank of England is warning of a systemic banking crisis and George Osborne has announced spending cuts that will continue for the next six years. The United States is the one part of the world where the news has been better recently, with signs of life returning to the housing market and a welcome fall in unemployment.

Even as stocks swoon and worries mount, our president continues to hold his head high — a little too high, in fact — every time he strides to the podium. This makes him the anti-Princess Di. He is always triumphantly chin up, just as she, poor thing, was always tremulously chin down. Given the lousy state of the economy, he might try to be a little self-effacing himself. He should stop acting as if he expects his every word to be greeted with rapturous applause.

Even though the U.S. financial system nearly experienced a total meltdown in late 2008, the truth is that most Americans simply have no idea what is happening to the U.S. economy.  Most people seem to think that the nasty little recession that we have just been through is almost over and that we will be experiencing another time of economic growth and prosperity very shortly.  But this time around that is not the case.  The reality is that we are being sucked into an economic black hole from which the U.S. economy will never fully recover.

What’s happening in America – where the Federal Reserve has used two rounds of quantitative easing (QE) to boost the money supply and announced its intention to keep interest rates low – has encouraged the belief that recovery will eventually come, provided the policy response is big enough for long enough.

Why would anybody pay $2.6 million to have a “power lunch” with Warren (“Please, may I have a tax hike, Mr. President?”) Buffett? But someone who wishes to remain anonymous did just that on Friday night — bidding on eBay. The proceeds will go to a charity in San Francisco that feeds those who have “given up on themselves.” It seems appropriate. Perhaps Mr. Buffett could start a billionaires-for-diminished-self-reliance club.

Technically, what the Fed did was to inform the world that it will keep interest rates at their present target of around zero percent until 2013. For non-economists, this means something simple: The Fed will continue to pump practically as many dollars as it can print into the battered economy. An announcement of target interest rates is routine; the Fed sets them eight times a year. But it has never before revealed a specific duration for interest rates. That’s a big deal, and the subtext is larger still.

One more problem is debt.  Collectively, the U.S. government, the state governments, corporate America and American consumers have accumulated the biggest mountain of debt in the history of the world.  Our massive debt binge has financed our tremendous growth and prosperity over the last couple of decades, but now the day of reckoning is here.

It remains to be seen whether this is indeed the case, since there have been false dawns galore since the financial system froze in 2007. The real strength of the US economy will be revealed early next year, when tax breaks supporting consumption and investment are removed and when the world’s biggest economy starts to feel the impact of the slowdown on this side of the Atlantic.